Technical Update: S&P 500 Reversal Day

Technicians will have a lot to talk about after today’s volatile trading. Specifically, the S&P 500 put in what’s known as a “reversal candle,” which is signaling to many that we finally may be in for that pullback that everyone has been looking for. Essentially, we saw the S&P 500 hit higher highs from yesterday’s close (hitting a fresh intraday all-time high of 1,687), and then close lower than yesterday’s close. This typically hints that the buyers are exhausted, and usually comes at or near trend turning points. Whether we have this pullback or not is anyone’s guess right now, so traders will be eagerly looking for any follow through tomorrow to confirm today’s bearish warning. With the Fed still in the market based on today’s testimony, however, the downside is somewhat limited to 1,635 and then 1,600 after that, which were previous resistance levels on the way up.

Additionally, despite today’s negative technical indication and expectations for a pullback, there is still actually technical room to the upside (see below). From the March 2009 lows to today (on the weekly chart), we are still roughly 5%-6% away from testing the upward trading channel ceiling (top white-dotted line – likely near the 1,750 handle) and Fibonacci top. Admittedly, we are somewhat overbought at current levels with the RSI above 70, but those putting in shorts right now may be in for further pain if sellers don’t show up in the days to come (keep in mind also that we have a holiday week coming up with lesser volume expected).